I had to think long and hard about making this blog post. That’s because I know I’m going to get push back and questions. So, let me answer it up front by telling you what to do.
Read the entire blog post. The answer is in it. It’s a question about depreciation and it’s one that can save you a lot in taxes, but most people get it wrong.
So, here’s what happened.
A client of mine asked what to do about their real estate. They were following all the rules, they thought. They had bought real estate that looked like it would eventually go up in value but because they lived in an area that had high prices, it didn’t cash flow.
They still wanted to hang on to it, though, so what could they do to take the deduction?
Answer: If they had a loss after just taking the direct and indirect expenses as deductions, then they should not take depreciation deductions. That’s step one.
In general, though, they need to look at their criteria for buying investments. They need cash flow and they need passive income. Maybe it’s time to sell one of the real estate bad deals to free up money and credit to invest in properties that do actually put money in their pocket.
Often people who fall into this trap have bought property for emotional, and not financial, reasons. If you want a second house, and can afford it, then buy it. Don’t try to pretend it’s an investment. If you want to buy a special house for your kids, then buy it. But don’t try to make it an investment.
Often the best real estate investment is NOT a house that is your dream house. That is unless your dream is to have investments that provide cash flow so you can live a life free from the financial constraints of a job.
Lesson: Know your numbers. If an investment isn’t cash flowing, don’t make it worse by adding in depreciation. But, you probably also need to think about what are you going to do about these investments. Is it time to dump the bad real estate investment?
And in answer to the question that I know I’m going to receive, “Rev Proc 2004-11”. Yes, you CAN stop depreciation. No, you will NOT be penalized if you do so. The answer is Rev Proc 2004-11.
I’m going to be talking SPECIFICALLY about this tax saving technique in our October coaching session. If you’re not yet a member, you can join by going to https://www.ustaxaid.com/coaching-program/. Coaching sessions are always on the first and third Wednesday of the month at 5 pm Pacific. If you can’t make it live, they will be recorded.